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As the crisis has shown us, the original design of the euro has been incomplete. It became clear that the euro area lacked certain institutional elements which are essential to federations with a single currency. Three of these shortcomings were particularly acute and contributed to the euro area sovereign debt crisis.
First, the Maastricht Treaty was a child of its time. It reflected the ambient overreliance on the disciplinary effects of markets. Second, macroeconomic imbalances often precede fiscal disequilibria. Third, Europe lacked a coherent approach to financial sector policies. Regulatory frameworks and financial policies remained insufficiently harmonised and centralised, neglecting the increasing level of financial integration in the euro area.
In light of the crisis and the urgent responses it required in the short term, one may lose sight of the major institutional progress achieved since the crisis erupted: The fiscal framework has been strengthened since the start of the crisis to improve fiscal discipline and restore fiscal sustainability in euro area Member States. Also, economic governance at European level has been improved by implementing the Macro-economic Imbalance Procedure (MIP). Finally, the establishment of a Banking Union has been agreed and is now being delivered in stages, starting with the Single Supervisory Mechanism (SSM).
As a second, indispensable pillar of the Banking Union, the SSM will need to be complemented by a single resolution mechanism (SRM). Once the single supervisory mechanism is operational and supervision is passed to the European level, the same needs to happen for resolution. Therefore we strongly support the envisaged timeline for the SRM to become effective in January 2015. In sum, the euro area is actively moving in the direction of a more robust and safer financial sector within the context of a strengthened monetary union.
The credibility of these policies and actions at national and supranational level and the return of confidence in the euro is demonstrated by three recent positive developments in the euro area financial markets. First, the substantial capital inflows to the euro area in recent months. Second, the receding financial fragmentation across various euro area market segments. And, finally, the limited contagion from adverse news compared with earlier stages of the euro area crisis. Similar to the positive developments in international capital flows, financial market fragmentation has declined over the past year.
Now that financial fragmentation has been receding on the funding side of the banks, a key challenge remains in alleviating fragmentation on the lending side of the banks, especially towards stressed countries and towards SMEs. Taken together, the return of foreign investors, receding financial market fragmentation and a halting of contagion clearly demonstrate a return to confidence in the euro, and the credibility of the measures taken at supra-national and national level.